economics – Between Hell and High Water

Taxes: The Looming Social Security Mess

By Mike Koetting May 26, 2026

This and my next post are on the American tax structure. The material draws heavily from The Second Estate, a superb book by Ray Madoff, a law professor at Boston College. I highly recommend it if the topic interests you. It is short and a surprisingly easy read. Her discussion covers much more than the items I am highlighting.

Payroll Taxes

Today’s post focuses on payroll taxes, specifically Social Security and Medicare. I chose to start here because the problems of the income tax system often overshadow the issues around payroll taxes. To be honest, I had never given the matter more than a passing thought before reading her observations on the topic. I was surprised, for instance, that 67% of taxpayers pay more in payroll taxes than income taxes. All told, payroll taxes are the second largest source of federal revenue, comprising more than a third of federal revenue.

Still, people get confused as to whether payroll taxes are “real” taxes. In 2012, candidate Romney described the 47% of the population who pay no income taxes as freeloaders. But that isn’t the case. Most of these pay payroll taxes. When you include payroll taxes, the number of people not paying some federal tax drops to 16%–and most of those are still paying state and local taxes of one sort or another. (Since 2012, the percentage of people not paying any income tax has dropped from 47% to 40%.)

Payroll tax is 15.3% of the wages or payment in lieu of wages. This amount is subdivided between support for Social Security (12.4%) and parts of Medicare (2.9%). The amount of payroll taxes rises directly with wages, sort of. Employed individuals pay only half this amount (7.65%) in the form of a deduction from their salary; the other half is paid by the employer. However, economists broadly agree that employer payment of these taxes holds wages down, so it’s not exactly “free”.

Self-employed people pay all 15.3% themselves. For gig workers and independent contractors, this means that, for example, of the first $60,000 they earn, more than $9000 will go for payroll taxes. Additionally, payroll taxes are calculated on the full amount of the earnings, even though some of those earnings will most likely be paid to the Federal government in the form of income tax.

Social Security taxes only apply to the first $168,600 of earnings. While $168,600 is a healthy income, about 6% of the population earn more and, since, by definition, those are high earners, about 17% of the nation’s wage earnings fall outside this limit and are, therefore, not subject to Social Security taxes. It is also the case that some types of income fall outside payroll taxes. For instance, limited partners and owners of S-corporations largely avoid payroll taxes on a significant share of their income. These exclusions are in addition to the 17% of wages that are not subject to Social Security taxes. To add insult to injury, many of the nation’s richest people do not get compensated by wages and do not even hit the $168,600 cap. Elon Musk and Bill Gates, for example, do not receive compensation through wages and pay nothing toward Social Security or Medicare, two of the nation’s top three expenditures. I doubt they are worried they will not be eligible for those benefits.

Moreover, because payroll taxes are less obvious to the public, Congress has been able to raise them with less outcry. Since 1970, payroll taxes have more than doubled while the top income tax rate has fallen from 70% to 40% and estate taxes, once 77%, have become immaterial in many cases because of lower rates and various loopholes that exempt funds from taxation. (More on that in the next post.)

Problems Ahead

On the other side of the equation, at any given time, about one in five Americans receive some form of Social Security benefits. These benefits help stabilize the economy by providing support for the retired and for people not capable of working. Without these benefits, not only would the recipients be hurt, but the decrease in expenditures made by or on behalf of recipients would adversely impact various sectors of the economy.

Unfortunately, the Social Security Trust Fund is steaming towards insolvency. This is currently projected to happen in the early 2030’s, just six or seven years from now. Under current law, this will require a material reduction of benefit levels for everyone. Although people are often confused on the point, there is no accounting link between money an individual puts into the fund and the benefits paid out. Social Security is a “pay-as-you-go” bucket. Each year taxes are paid in and benefits are paid out. Historically, this has worked well because increasing wages and population growth, the latter partially fueled by immigration, meant the fund has always been able to cover benefits and, typically, leave a surplus for future years.

But the world is changing. Older people are living longer and population has stopped growing—fewer children and kicking out immigrants. In 1960, there were 5.1 workers for every beneficiary. Today, it is 2.7 and that ratio will continue to decline. Without other changes, the surplus that has sustained the fund will be exhausted. The total pay-in is estimated to be about 83% of current benefit levels. Existing law mandates that if the pay-in sum falls short of the pay-out rate, all benefits should be reduced on a pro-rata basis to equal the pay-in sum. Reductions could, therefore, be larger if revenues decline faster than anticipated or additional benefits are paid out. (Trump’s Budget Bill, for instance, reduced revenues for the Trust Fund because in giving a tax break to some seniors, it curtailed revenue to the Trust Fund. This is not the biggest issue but is estimated to accelerate the insolvency of the Trust Fund by six or so months.)

One would think Congress would be all over this issue. More than 80 percent of Americans oppose any benefit cuts. Even among high income groups, those most likely to believe benefits should be cut, 73 percent oppose cuts. The current lack of serious Congressional discussion is huge cause for concern. This issue needs to be addressed much sooner than later. Any fix will require some time to negotiate and implement. As the American Academy of Actuaries points out, if reforms are left until the last moment, they might well require more drastic actions.

The lack of action is not from lack of alternatives. The problem is a lack of will in our constipated Congress. It is highly likely that whatever happens will cause someone to be unhappy. Generally, Democrats want more revenue and Republicans want to cut benefits. For better and worse, neither side has enough votes to impose its vision on the other side. The overall toxicity of the environment makes the kind of compromises necessary hard to the point of impossible. The problem is further acerbated by the fact there is a material group of Republicans who keep trying to find ways to privatize Social Security, despite an amazingly broad opposition to the idea.

Most likely solutions—if any can be reached– will impose some mix of greater revenue and changes in benefits. The Brookings Institution has circulated a thoughtful proposal that in normal times could be the basis of a bipartisan appeal. As would be expected on issues this major, the proposal is complicated and resists easy summary. It includes about 15 separate elements and has proposals that raise revenue, including raising both the tax rate and the taxable ceiling, and working to increase legal immigration, but also increasing some benefits and shaving others. The specifics of this proposal aren’t necessary for this essay—not only are they very wonky, but there are surely other proposals with equally plausible specifics. The important point is that there are solutions that could avoid a catastrophe, should Congress choose to accept its role.

The situation with Medicare is similar to the problems in Social Security. Medicare’s financing structure is actually more varied than Social Security. Medicare has several different sources and funds. But the Medicare portion of the payroll taxes that supports Medicare inpatient care is heading for the same rocky shore as Social Security. It will also be broke in the early 2030’s for the same reasons, fewer people paying in and people living longer. It is further fighting a headwind of healthcare costs rising faster than overall wages, thereby making it harder for payroll taxes to keep up. A similar set of solutions is required on roughly the same timetable.

Inevitable Conclusion

There is little market in today’s American political scene for proposals with complicated moving parts. But any proposal that isn’t multifaceted is going to increase material problems elsewhere in society. Time is running out. Without Congressional leadership and a Chief Executive willing to support the kind of negotiation necessary, this problem will not be solved. In other words, we’re stuck till at least 2029. Those who depend on Social Security should be worried, very worried.

The Economy for Young People

By Mike Koetting January 6, 2026

The question of what one generation owes to the next is a complicated one, but I am struggling to find any register on which American society is doing a good job of giving young people what they need to have good and fulfilling lives.

This and subsequent posts will look at three important areas where as a society we seem to be doing a particularly poor job facilitating the next generation’s route to good lives. Today’s post will focus on young people in the economy. The next two will consider how we are treating post-secondary education, and, finally but more broadly, what view of the future we are giving to the people who will live it.

Widespread Problems Have Disparate Impacts

Many—perhaps most—of the problems in our economy apply to many age groups, not just young people. But, as I will try to show, the damage to young people is particular, mostly because of the way it shapes their outlooks and their life-long trajectories.

The core problem of the American economy is that the benefits of the economy are going disproportionately to capital rather than labor. We’ve all seen the graphs.

U.S. Bureau of Labor Statistics

Which, of course, has led to a serious divergence in income growth among various cohorts of the economy, with after-inflation growth of the top tiers seriously outpacing the rest of society.

Again, while this impacts everyone in the bottom 80% of the income distribution, the impacts on young are magnified. They have no resources on which to fall back. They are seeking for the first time many of the things all adults want to have–their own car, have their own place, be able to imagine starting a family.

One consequence of these immediate difficulties is that a great number of young people can’t understand how they are going to make their way in life. This is a major change in the social framework of our society. From the end of World War II until, somewhat arbitrarily, the 2008 recession, there seemed to be multiple life paths. Not that they were equal and their real-life availability varied across the population. And cracks started showing well before 2008. Still, most people coming of age over that period could readily imagine a track to a good life—professional, white collar, gray collar, or blue collar. All of these tracks, in varying degrees, promised employment at a wage that afforded a house, a car, and a vacation. It was simply assumed that these jobs would offer health insurance and pension. In that context, marriage and kids made sense. The gradual accretion of women into the labor force helped ice the economic cake, even if it created other issues

By contrast, most of today’s young people are deeply skeptical these pathways will be available to them. For many, they are already facing serious headwinds. In a poll of young people by the Harvard Institute of Politics 43% of people in their sample reported struggling or getting by with limited financial security— and this strain is especially pronounced among Black and Hispanic young people and those without a college degree. In another study of young people, nearly 40 percent of survey participants said they were taking on additional jobs to make ends meet.

Bad Job Market

One of the biggest problems for young people is that the job market is inhospitable. Even those who have graduated from college can find the sledding difficult.

The three-month moving average unemployment rate for recent U.S. grads sits around 5.3% versus 4.2% for the overall workforce; on some measures for degree-holders it pushes ~6–7%. This is being driven by a number of factors. In some cases, it is in fact AI, or, more likely, the expectation of AI. It also reflects the economy of not hiring people who will take a while to ramp up their skills. Both of these have become problematic for today’s cohort because it is looking increasingly likely that during the economic “bounce back” from the pandemic many companies over hired on the assumption their growth would continue at that pace. It hasn’t. With insufficient demand, companies would have to lay off workers to make new hires. They don’t want to. And the problem is amplified because consumer confidence is in the toilet and people are unwilling to leave the jobs they already have. When there are fewer voluntary movers, the number of job openings decreases. All of this generates a longer-term problem because when young people don’t get starting jobs, they are blocked from the opportunity of on-the-job learning and run the risk of permanently lower income and skill levels.

The problems for those who would otherwise head into blue collar jobs are different in particulars, but similar in outcome. On balance, manufacturing jobs in the US have declined as a part of the workforce. This has been going on for years but has recently accelerated dramatically, falling by almost 25% since 2020. This is driven by both automation and trade policies. When total jobs in a field disappear, there are inevitably fewer job openings, which of course is disproportionately felt by young people, setting in motion a chain of problems that stretch over a lifetime.

Student Debt

I have heard many adults dismiss the issue of student debt as some version of “entitled young people”. I am not sure they understand the magnitude of the issue. One in four adults under the age of 40 have student loan debt. This totals to about $1.8 trillion held by 42 million different people, most of them between the ages of 20 and 40. In 2025, the average amount of the loan debt is $50,000, And while there are some people in this mix for whom the student loan was the ticket to a very well-off life style, there are many more for whom this was a marginal investment, or, worse yet, yielded no tangible economic advantage.

To be sure, what’s going on with student debt is intractably related to the cost of college and, further, its role in our society. I will return to these in the next post, but here I am simply pointing out that student debt is a major economic fact in the lives of young people. There is evidence that by itself it reduces home ownership and negatively impacts family formation. It can materially impair credit scores, which leads to higher rates for everything from credit cards to mortgages.

It is hard to put these policies into a global perspective because so many aspects of American post-secondary education are unique. But other countries have chosen different approaches that result in little to none of the anxiety that we have created in America. For all the heat the discussion has attracted, neither party has put forth an agenda remotely commensurate with the problem. Impact of recent changes as part of the Trump administration is still being sorted out—and may include some very modestly useful reforms. But the decision to renew garnishing salaries for delinquent student loans will certainly cause some real hardships.

Housing

The increase in housing costs is well discussed as a problem afflicting all portions of the population. Inflation-adjusted housing costs, rent and purchase, have increased almost 25% more than median wages in the last five years. The result is that the entire bottom range of the income distribution is facing increasing difficulties in affording housing.

But, again, the impact on young people is particularly stark. Median age of first time home ownership, for instance, reached 40 this year, an all-time high according to the National Association of Realtors. The following chart is a poster for the problem.

U.S. Census Bureau

In Short

Darren Walker, President of the Ford Foundation, said “Hope is the oxygen of democracy.” But it’s not at all clear that the current economic situation is generating hope in young people. Rather, it is raising concerns as to whether they will find jobs that pay enough for a comfortable life, be able to own their own home, be confident they will have health insurance, be able to afford children or retire at a reasonable age. And while all young people have some degree of apprehension, it would be inexcusable to overlook the greater pessimism about having a good life among those who start out with few advantages. It is no wonder so many feel the game is rigged.

Rather than generating hope, then, I am worried the current situation is generating fear in young people. That is a very bad thing. As Yoda says: “Fear is the path to the dark side. Fear leads to anger. Anger leads to hate.”

And hate, as we have seen, is a threat to democracy.

Inequality Is Giving Money to Rich People

Mike Koetting April 22, 2025

Many Americans are white-hot angry at their situation in life. More and more families are having a difficult time making ends meet. The sense that they are no longer fully participating in the promised life can be found everywhere. Two-thirds of middle-class families say they are struggling financially.

It shouldn’t come as a surprise that many families are feeling short-changed since the richest Americans are increasing their share of wealth at the expense of everyone else. This is primarily a result of deliberate policy decisions. The surprise is that so many of the people feeling short-changed voted for an agenda promising more of the same.

In 2023, the total share of income earned by the bottom 90% of workers was less than 50%. In other words, the bottom 90% altogether made less than the top 10%. There is nothing inevitable about such a distribution. Most countries with American standards of living have more equal income distributions. In fact, America used to have a more equal distribution.